Certified Plan Sponsor Professional (CPSP) Practice Exam

Is a company required to have profits to contribute to a profit-sharing plan?

1. Yes

2. No

3. Only if profit goals are not met

4. It depends on company policy

The correct answer is: No

A company is not required to have profits to contribute to a profit-sharing plan because profit-sharing contributions can be structured based on various factors. While many companies choose to align contributions with their profitability to incentivize employees, the law does not mandate profits as a condition for contributions. Companies can opt to contribute even in years where they do not generate a profit; this is often related to their overall compensation strategy and retention efforts. It gives them the flexibility to provide benefits to their employees regardless of the current financial status. Moreover, some plans might allow for contributions based on other metrics, such as company cash flow or strategic business goals. In this context, focusing only on profits as a requirement for contributions may not capture the full range of company policies or contributions strategies. Thus, the ability to contribute to a profit-sharing plan without having current profits highlights the importance of strategic planning in employee compensation and benefits rather than a strict adherence to profit generation.